One effect the American shale boom had in triggering the oil price collapse of 2014 – it drove discipline and technology into the offshore oil domains where breakeven costs now match or are lower than shale. With oil prices and profits rising, the race begins again to over-supply the world.
As this column goes to press, the world oil price is well north of $70 a barrel, a long way from the nadir of $30 a mere 30 months ago. So the oil forecaster’s parlor game is again in full swing. Will we see a return to the $150 barrel, the peak last experienced in early 2008?
We’ve seen this movie before. Peak price speculation invariably follows an earlier period of similar guessing about how low prices will drop. All commodities in the world run in price cycles that feel a lot like “Groundhog Day,” the iconic 1993 movie.
No one knows where the price ceiling will be this time. But one thing we can count on: higher prices stimulate more drilling. America’s oil production and crude exports are setting new records. But for those bullish on what America’s shale producers can yet do (count me in that camp; see my earlier Shale 2.0 paper and Amazon-effect column), even if U.S. shale output doubles, America would only produce 15% of global oil. The source of the remaining 85% is a critical question for the world and for investors.
Over 70% of world oil supply comes from just two sources: about 40% from OPEC, plus about 30% from offshore production. OPEC constitutes a cartel of a dozen cooperating oligarchs desperately trying to prop up prices. The offshore industry is dominated by a dozen highly competitive companies desperately chasing technology to make profits at low prices.
Mark P. Mills is a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering. In 2016, he was named “Energy Writer of the Year” by the American Energy Society. Follow him on Twitter here.